Citadel Throws E-Trade a $2.5 Billion Life Raft

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By Staff Reports

Despite recent financial troubles, E*Trade Financial Corporation (NASDAQ: ETFC) is not going bankrupt.  Citigroup Investment Research analyst Prashant Bhatia caused a minor panic (and a 59% sell-off) earlier this month, when his November 11th report on E*Trade stated, "Bankruptcy risk cannot be ruled out."

Whatever risk there was earlier this month, it has now been erased.  A group led by hedge fund manager Citadel is injecting $2.55 billion into the struggling trading and financial services company, buying a share of the business and taking E*Trade’s riskiest assets off the books.

Out of Citadel’s total investment, $800 million is going towards the purchase of those risky assets, valued at $3 billion.  "What this deal does is, it takes our asset-backed securities portfolio off the table.  That’s our biggest source of concern that’s totally behind us," Jarrett Lilien, E*Trade’s acting CEO, told Bloomberg.

Citadel is acquiring the securities for 27 cents on the dollar, an indication of how weak the credit market remains.

Another $1.6 billion – with a further $150 million coming in January 2008 – is going towards the purchase of a 20% stake in E*Trade, and a seat on its board.

While E*Trade shares jumped significantly following the news of Citadel’s investment, the price quickly returned to prior levels. The company’s expected losses in the fourth quarter are reason to remain wary of the stock’s short-term fate.  Though the threat of bankruptcy has now disappeared, E*Trade still has to write off the $2.2 billion gap between the book value of the company’s recently-sold securities and the amount paid for them this quarter.

E*Trade also announced it expects further blows from its portfolio of home-equity loans, "in excess of the quarter’s expected losses that will result in an ending allowance of over $400 million," reports MarketWatch.

For a company that controlled $227 billion worth of assets as of October 31st, this is a painful, but not fatal, setback.  The fourth quarter will not be a happy one, but the bad news has already been priced into the company’s stock.

Citadel is known for buying into distressed assets at or near the bottom, and then turning nice profits during recovery.  For this reason, some analysts have told Fortune Magazine they see this $2.55 billion contribution as a sign we are nearing the end of the credit crisis, or at least through the worst of it.

Others, however, are more cautious.  Bank of America (BAC) bought into Countrywide Financial Corporation (CFC) in August, and since then the crisis has only continued to deepen.

In all, most of the analysts Fortune spoke with admit that the credit crisis is so large, it is still difficult to predict exactly when it will end or what sectors it might damage next.

All this cash infusion really means isthat when credit does rebound, E*Trade will still be around to enjoy the recovery.

News and Related Story Links:

  • Fortune:
    Citadel-E*Trade: Calling the Bottom?

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